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Affirm IPO Highlights Rapid Growth of ‘Buy Now, Pay Later’ Industry

Affirm kicked off trading on the Nasdaq on Wednesday, amid what has turned out to be a good year for “buy now, pay later” companies. Shares of Affirm, the first major tech IPO of 2021, popped in early trading Wednesday, jumping 100 percent from the $49 per share open to just over $100 per share before closing out the day at $97.24 per share.

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The San Francisco-based company priced its IPO at $49 early on Wednesday, offering 24.6 million shares and raising proceeds of $1.2 billion in the process. Yahoo! Finance data shows roughly 24.9 million shares were traded on the first day.

CEO Max Levchin founded Affirm in 2012 after co-founding PayPal with Peter Thiel in 2000. Affirm is one of the leaders in the “buy now, pay later,” or BNPL, industry, which has experienced a business boom in large part due to the pandemic.

Industry growth

Some 25 companies in the BNPL space have raised $1.7 billion in known venture capital funding since 2016, according to Crunchbase data. Affirm accounted for a vast majority of that funding, raising $1.5 billion alone.

In late December, a Bank of America survey predicted apps such as Afterpay, Affirm, Klarna and PayPal were poised to “grow 10-15 times by 2025 to eventually process between $650 billion and $1 trillion in transactions.”

In the same month, NBC News reported Klarna saw consumer downloads of its app grow over 106 percent from 2019, while competitors like Affirm and Afterpay saw sales spike, in some cases by as much as 200 percent, during different periods in 2020.

Although it seems like attention to BNPL is new, the space has actually been around for 15 years, according to Kamran Ansari, venture partner at Greycroft, which invested in e-commerce pay-over-time financing tool Credit Key. One of the pioneers in the space was Bill Me Later, which was later bought by PayPal in 2008, he said.

Ansari categorizes companies like Affirm and Bread, which was acquired by Alliance Data Systems last October, as the “2.0” version of Bill Me Later, which originally required paper forms to be filled out.

“Affirm and Bread created a newer version that has digital installment programs for e-commerce, but are doing them in real time,” he said. “The idea was to have bigger-ticket purchases broken up. It was also an option for people who didn’t want to put the purchase on a credit card that was charging a high interest rate or for younger borrowers who didn’t have a credit card.”

Later, companies including Afterpay and Sezzle debuted, offering benefits such as paying in four installments.

The appeal for venture capitalists investing in BNPL startups is that the companies essentially get two revenue streams. The first occurs when a purchase is made and the merchant pays 2 percent or 3 percent of the price to the BNPL service. The second revenue stream comes in the form of interest payments from the borrower, Ansari said.

“All of that is done in a seamless, digital way, not by mailing out letters,” he added. “You get the customer’s information online, and it is an efficient way to offer lending. Plus, the merchant is helping you acquire the customer, so you are not doing much marketing.”

Inside Affirm’s IPO

Affirm has raised a total of $1.5 billion in funding from investors including Durable Capital Partners, GIC, Thrive Capital and Spark Capital. It most recently raised a $500 million Series G round led by Durable and GIC in September 2020.

The company listed its shares on the Nasdaq Global Select Market under the symbol AFRM.

As part of a partnership between the two companies forged last year, e-commerce platform Shopify is also a major investor in Affirm and owns about 20 million shares of the company, now worth around $2 billion, according to CNBC.

Morgan Stanley, Goldman Sachs and Allen & Company acted as lead book-running managers for Affirm’s offering. RBC Capital Markets, Credit Suisse and Barclays were among the book-running managers for the offering.

What’s next

Looking forward, Ansari sees more BNPL startups adapting to work with businesses and for smaller consumer purchases—think a $30 shirt.

For small businesses, buying $10,000 worth of supplies might be an awkward use of a credit card, so they often have a line of credit, a process that often still uses older technology like PDFs and fax machines.

“Credit Key is bringing this same model for businesses, whether it is a restaurant buying supplies or a dentist needing equipment,” he said. “At the point of checkout, you click a button that you want to pay in installments, enter four or five fields and get a real-time decision of credit with this merchant.”

Ansari also expects more platforms to service nonprime consumers, much like what Katapult, which provides e-commerce point of sale financing, has already done.

In December, the company announced it would go public via a merger agreement with FinServ Acquisition Corp. in a deal valued at about $1 billion. Katapult CEO Orlando Zayas, told Crunchbase News that the merger deal is expected to close in April.

Zayas said the BNPL space is growing because more consumers not only became comfortable buying online over the past year, but also needed these types of financing options, especially for the nonprime consumer, which he defines as anyone who has been turned down for credit.

“In the past, nonprime consumers were pretty much left behind, they really didn’t have a choice. Many of the options out there like Klarna and Synchrony focus on prime customers. We’re able to bring that nonprime customer the same buying choice that a prime holder could get,” Zayas said. “Right now, buy now, pay later is promising for the consumer to buy online with the same velocity as in the store. In fact, there are more options from a financing perspective.”

Illustration: Li-Anne Dias

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